Stepped-up basis in tax policy protects family farms By JohnNewtonandScott Gerlt
ter the size of the farm operation. This obligation discourages the sale of land, thereby potentially increasing the cost of farmland. Another way to put the potential ef- fect of removing stepped-up basis into perspective is to compare the potential capital gains tax on land to the rental income from the land, in order to es- timate how long it would take to offset the loss of stepped-up basis if the capi- tal gains tax was fully incorporated into the land price. The number of years varies by state, but is more than four years based on na- tional average rental rates and the esti- mated tax burden. In states with larger urban areas, it would take longer to pay off the capital gains tax, because land values are rising much faster than cash rental rates, as non-agricultural uses drive up land prices. Heirs facing these taxes would incur steep costs from selling the land, there- by increasing costs for everyone in the marketplace. If an estate is passed on with debt, it may not be possible for the family to meet the tax obligation. To protect these family farms andmin- imize the impact of capital gains taxes, it’s important that farms have continued access to stepped-up basis. Eliminating stepped-up basis to generate more federal income risks the livelihood of America’s family farms and the economic sustainability of these family operations long into the future. (John Newton is chief economist for the American Farm Bureau Federation and Scott Gerlt is an economist with the American Soybean Association. This piece is adapted from a post on the AFBF Market Intel blog.)
Any change in capi ta l gains tax policy that eliminates or scales back stepped-up basis could resul t in a massive tax burden on the agricultur- al sector. Capital gains taxes are based on the change in the value of an asset, such as farmland, livestock or timber, when that asset is sold. Currently, the top cap- ital gains tax rate is 20%. To reduce the capital gains tax, farmers and ranchers use stepped-up basis, which provides a reset for the basis during intergenera- tional transfers. In effect, upon the transfer of assets following a death, the basis is reset to the market value at the date of death. Following the adjustment, taxes can be levied only on gains realized by the in- dividual during his or her ownership, not on gains realized prior to the step up in basis. One of the reasons the step up in basis is so important to farmers and ranchers is the asset values in agricul- ture have appreciated significantly in recent years. As a result, when farm- land is inherited, without a step up in basis, many farmers would face very significant capital gains taxes. For ex- ample, since 1997, the average crop- land value in the U.S. has increased 223%, rocketing from $1,270 per acre to $4,100 per acre. In areas such as Iowa and Illinois, the average cropland value has increased more than $5,000 per acre since 1997. Similar changes in cropland values have occurred in areas near metro- politan centers, such as in Florida and California and along the East Coast. Assuming a capital gains tax of 20% on
The rising value of U.S. farmland would lead to significant capital gains taxes on inherited farmland without use of a stepped-up basis to minimize the impact on family farms.
the change in cropland value from 1997 to 2020, farmers would face estimated capital gains taxes of more than $1,000 per acre in California, Iowa, Illinois, Delaware and New Jersey. Based on national average cropland values, the average capital gains tax would exceed $560 per acre. A capital gains tax of more than $500 per acre does not immediately convey the significance or magnitude of the tax increase, so it’s important to put this tax into perspective. Farming and ranching is an asset-intensive and low-margin sector. According to the U.S. Department of Agriculture, the projected five-year average rate of return on farm assets is 2.8%. At this rate, $1 million in farm
assets would only generate an annual income of $27,800. As a result of lower returns on farmland assets, taxes based on asset valuation become even more significant for agricultural producers, because the assets generate much low- er returns than other asset classes. The capital gains tax was calculated based on the appreciation of farmland. Based on the average change in crop- land values, U.S. average cash rents and the estimated capital gains tax, the cap- ital gains tax in the U.S. would equate to more than 400% of the average cash rental rate. Let that sink in. The capital gains tax per acre in 37 states is more than 400% of the average cash rental rate—a very large tax obligation for many farm families to meet, no mat-
VOL. 48, NO. 15
April 21, 2021
AG ALERT ® weekly newspaper is an official publication of the CALIFORNIA FARM BUREAU
www.agalert.com www.cfbf.com
@cafarmbureau @cafarmbureau @cafarmbureau
@calfarmbureau
Board of Directors (District 1) Al Stehly; (2) Andy Wilson; (3) Terry Munz; (4) KevinMerrill; (5) Jenny Holtermann; (6) Joey Airoso; (7) Donny Rollin; (8) Richard Bianchi; (9) Tom Rogers; (10) JanGarrod; (11) JoeMartinez; (12) Paul Sanguinetti; (13) Ron Peterson; (14) Ken Mitchell ; (15) David Barhydt; (16) Garrett Driver; (17) Domenic Carinalli; (18) David Rosenthal; (19) TomStewart; (20) JimMorris; (21) Blake Alexandre; (Young Farmers & Ranchers Committee Chair) Lindsey Mebane. Advisory Members Ronnie Leimgruber, Chair, CFB Rural Health Department; Glenda Humiston, University of California Cooperative Extension. Letters to the editor: Send to agalert@cfbf.com or Ag Alert, Attn: Editor, 2600 River Plaza Drive, Sacramento, CA 95833. Include name, address, phone number, email address; 250-word limit.
Melanie Duval- Chief Marketing Officer Dave Kranz- Editor/Director, Publications and Media Relations Christine Souza- Assistant Editor Ching Lee- Assistant Editor Kevin Hecteman- Assistant Editor Karin Bakotich- Design Services Manager Jessica Cook- Graphic Artist Paula Erath- Graphic Artist Margaret Rodriguez- Operations/Production Manager Darla Quidachay- Production Assistant Chico Ochi- Administrative Supervisor GENERAL INFORMATION: (916) 561-5570 agalert@cfbf.com
ADVERTISING: Chris Tedesco- Manager, Marketing and Business Development (916) 561-5656 Brock Tessandori- Advertising Sales (916) 561-5585 Classifieds: (916) 561-5576 2600 River Plaza Dr., Sacramento, CA 95833. Represented in the East and Midwest by J.L. Farmakis, Inc. Eastern office: Bill Farmakis 48 Topfield Rd., Wilton, CT 06897 (203) 834-8832; Fax: (203) 834-8825. Midwest office: Russ Parker , P.O. Box 7, Albia, IA 52531 (641) 946-7646, Bob Brunker , 8209 NW 81st Ct., Kansas City, MO 64152 (816) 746-8814, Jennifer Saylor , 8426 N. Winfield Ave., Kansas City, MO 64153 (816) 912-2804, Laura Rustmann , 901 Lands End Cir, St. Charles MO 63304, (636) 238-8548. AG ALERT ( i s sn 0161 - 5408 ) i s pub l i shed weekly except weeks of Memor ial Day, July 4,
Thanksgiving, Christmas; and with exceptions, by the Cal i fornia Farm Bureau, 2600 River Plaza Dr. , Sacramento CA 95833 (telephone: (916) 561-5570) . Periodicals postage paid at Sacramento, California. POSTMASTER: Send address changes to AG ALERT, 2600 River Plaza Dr., Sacramento, CA 95833. The California Farm Bureau does not assume responsibility for statements by advertisers or for products adver t ised in AG ALERT nor does the Federation assume responsibility for statements or expressions of opinion other than in editorials or in articles showing authorship by an officer, director, or employee of the California Farm Bureau Federation or its affiliates. No alcohol, tobacco or political ad-
vertising will be accepted. Jamie Johansson , President
Shannon Douglass , First Vice President Shaun Crook , Second Vice President
Printed on Recycled Paper
BPA Business PublicationMember
2 Ag Alert April 21, 2021
Powered by FlippingBook